Employers must ensure their status determinations meet the requirement for reasonable care.
With taking reasonable care in making a status determination such a key aspect of the determining of a contractor’s status in relation to the Off-Payroll Working rules coming in to the private sector from April 2021 it is essential that companies fully understand how their assessment process is carried out, and how this aligns to the key points of law used in determining status.
In support of the Off-Payroll Working rules HMRC launched a free assessment tool to assist companies in their status determinations, the Check Employment Status Tool [CEST]. Since its launch it has been heavily criticised by many experts and the courts have even questioned whether the interpretation of law is applied correctly. This all centres on one key point, Mutuality of Obligation [MOO]. CEST has no particular test for this, instead it follows HMRC’s own interpretation of MOO, an interpretation that has been shown by the courts to be wrong and yet HMRC continue with their approach.
The tool has attracted many users as it also offers an assurance from HMRC that where the tool is used HMRC will stand by the determination and outcomes, so long as the information has been accurately represented. This assurance has also fallen short with HMRC classing the CEST outcome as ‘irrelevant’ in one court case.
So, what does this mean for an employer looking to rely on CEST for their Status Determinations?
The key risk for any employer relying on CEST for its Status Determinations is whether it will pass the reasonable care test. If a successful challenge were brought it could undermine all CEST determinations leaving employers facing the potential of significant liabilities.
Where reasonable care is not taken in making an assessment the contractor is able to make their own determination, using reasonable care, and where this is outside IR35 they do not have to take all the income subject to PAYE, they can take some as dividends. If it is subsequently found that the case was not outside, it is the end client that can be held liable for the additional taxes due.
With experts and the courts all questioning HMRC’s interpretation of MOO there is a real risk that this challenge may happen.
Many experts have developed their own tools or assessment services to support employers although in all cases these are charged for. This creates an unlevel playing field with many opting for the free CEST tool supported by the belief that it must be correct as it is HMRC’s own.
The size of the market would suggest that it would only be a matter of time before one, or a collective, of the commercial offerings would create a challenge of CEST on the grounds of failing reasonable care. If successful, the commercial gains would be significant.
Whilst CEST is marketed as ‘free’ it could prove to be the most expensive tool on the market if such a challenge were successful.
The commercially available tools are now all appearing to be supported by insurance offerings covering the risks in case of a challenge and subsequent tax liability. From our review of the market the terms of these seem to be widely different with some appearing to only offer cover where the determination is confirmed as correct, quite useless as there would be no claim required.
Where employers seek to use commercial offerings with claims of insurance backing, we strongly advise that the terms of the insurance offering are reviewed by your lawyers to ensure the full parameters of the insurance is understood.
IR35 assessments are complex cases and often rest on fine detail however up until now it has always been the contractor who has stood alone in the fight to prove their status. The changes coming in in April 2021 now means that it is the company that must prove the case. As it is the company that determines the working arrangements between themselves and the contractors many are now formally reviewing these to see where they can be amended to reflect a true outside IR35 relationship. Embracing this opportunity can result in many more contractors operating with their clients in ways that are genuinely outside IR35 and therefore save significant monies, and risk, for all.
We believe as firms develop their understanding and approach in this area those that are pioneers are likely to also gain a significant advantage in the market by having the choice of the best workers for potentially less cost.
What is critical is that the working arrangements accurately reflect the reality of the relationship and are not superficially engineered to deliver a particular outcome as this could be even more costly.